Low Bond Yields and Efficient Retirement Income Portfolios

Abstract

Today’s low bond yields present a significant challenge to investors, especially retirees. This article uses an autoregressive return model and a retirement income efficiency model to determine the optimal allocation to five potential investment options: cash, bonds, stocks, an immediate fixed annuity, and a variable annuity with a guaranteed lifetime withdrawal benefit rider, i.e., a GLWB annuity. Through simulations, it is determined that portfolios face a materially higher risk of failure than in the past and that guaranteed income products effectively “crowd out” cash and bonds in optimal portfolio allocations. Between the two annuity types, the GLWB annuity tended to receive a higher allocation than the immediate fixed annuity, although the relative attractiveness varied by scenario. In summary, while fixed income is generally considered safe, there are additional dangers associated with holding fixed income today that should be considered when developing an efficient retirement income strategy. <b>TOPICS:</b>Retirement, statistical methods, fixed income and structured finance